Turning our attention to the future direction of the stock, let's take a look at the intrinsic value of this company and try to explain to investors the reasons why it is a good buy or not.

Valuation

In stock valuation models, dividend discount models (DDM) define cash flow as the dividends to be received by the shareholders. Extending the period indefinitely, the fundamental value of the stock is the present value of an infinite stream of dividends according to John Burr Williams.

Although this is theoretically correct, it requires forecasting dividends for many periods, so we can use some growth models like: Gordon (constant) growth model, the Two or Three stage growth model or the H-Model (which is a special case of a two-stage model).

The sustainable growth rate is the rate at which earnings and dividends can grow indefinitely assuming that the firm's debt-to-equity ratio is unchanged and it doesn't issue new equity.

g = b x ROE

b = retention rate

ROE can be estimated using the Dupont formula:

Because for most companies the GGM is unrealistic, let's consider the H-Model which assumes a growth rate that starts high and then declines linearly over the high growth stage until it reverts to the long-run rate, a smoother transition to the mature phase growth rate that is more realistic.

G(2), g(3) and g(4) are calculated using linear interpolation between g(1) and g(5).

d) Calculation of Intrinsic Value

Year

Concept

Amount

Present value

0

Div 0

0,80

1

Div 1

0,85

0,70

2

Div 2

0,93

0,62

3

Div 3

1,05

0,57

4

Div 4

1,22

0,54

5

Div 5

1,46

0,53

5

Terminal Value

53,34

19,38

Intrinsic value

22,35

Current share price

29,27

Final Comment

When the stock price is higher than the intrinsic value, the stock is said to be overvalued and it makes sense to sell the stock. I would advise fundamental investors to consider getting away from this stock, according to our estimations.

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